The Spanish Budget for 2014. Will this help to stimulate the Spanish economy?

Claudia Vargas Puccio30/12/2013

The Spanish Government has approved the Budget for 2014. No surprises, the tax system will remain as it has been for 2012 and 2013. Far sighted policies that will generate growth and employment seem as remote as ever.

Many argue that "Spain is different". They mostly refer to the country's wealth in traditions and culture, and the Spaniard's general lax and positive attitude towards life's hardships. In this sense, it is excellent that Spain is different.

Unfortunately and most recently, phrases such as the above one or "Marca España" (a slogan famously pushed by the Government to change investors' image of Spain) have been crudely effective at highlighting the country's shortcomings making Spain different but for all the wrong reasons.

One of the latter has been the latest government decisions in fiscal policy which have placed Spain at the very top of Europe's tax regimes: Spain has Europe's highest income tax rates and has re-installed wealth tax, inexistent today in most EU countries.

In the past weeks, the Government has been quick to announce an increase of 1.3% in Government Revenue when compared to last year. Their reading has been positive arguing that "this reflects that the country's economic recovery is well underway," according to Minister of Finance and Public Administrations Cristobal Montoro. However, one should question the origins and validity of such revenue.

In September 2011 Zapatero's government brought back wealth tax for the years 2011 and 2012, with a general allowance of 700.000€ per person and an additional 300.000€ for the usual dwelling for residents. Interestingly, this tax had been previously eliminated by him and his Government in 2008.

Coincidentally at the time, Rajoy was running for president for the 2013 elections. A core message of his campaign was general tax reductions and the abolition of wealth tax.

When Rajoy won the elections, his government stated that it was of utmost importance that Spain focused on meeting with the proposed E.U. targets. They argued that targets were a reality for Spain and, in consequence, IRPF rates had to be increased temporary for 2012 and 2013. The abolition of Wealth tax was never mentioned.

The consequences of these measures have been enormous: growing emigration of high-educated Spanish young people; increasing numbers of well- established immigrants returning to their countries of origin; and a continuous and alarming growing unemployment rate, the highest in the EU.

Spain's 2014 budget has just been approved by its "diputados" (MPs), and is now only waiting for approval of the "senadores" (Senate). The proposed budget shows an income of 200.796 million, an increase of 1.3%, compared to 2013. After the corresponding transfers to the Regional and Local Governments, Spain's 2014 Government Revenue will be 128.160 million when compared to 2013's 126.746 million. As mentioned and according to Spain's Finance Minster Mr. Montoro, the revenue increase explains Spain's economic improvement.

However, the tax increase approved for 2014 is really the key point to understand the positive evolution of the Government's increasing revenue. For example, the temporary increase of the income tax rates for 2012 and 2013 has now been extended for application in 2014 too. The temporary re-introduction of Wealth Tax for 2011 and 2012 had also been extended to 2013,and now has been also stretched again to apply in 2014.

Briefly and as a reminder: income general tax rates were increased up to 7% on the maximum rate. Investment income is now taxed up to 6.000€ at 21%, between 6.000€ and 24.000€ at 25% and over 24.000€ at 27%. If we go back to 2007, a single rate applied of 18%

In respect to income tax, this decision will allow the Spanish Government to raise an extra income of 6.843 million. In total, the Government estimates to collect approximately 73.500 million from Income tax alone, this is an increase of 1.7% from this year.

Raising income taxes again is at the very least surprising. For more than three years Spain has not yet seen the destruction of employment ease. The economic recovery of the past weeks highlighted by the Government and other groups could purely be a reflection of solid economic recovery elsewhere: investors from countries which still see Spain as a safe destination for their investments. Or more simply: Spain as the perfect holiday destination.

Though we can't be certain of the consequences of applying more liberal economic policies, we suggest that supporting investment through a benevolent fiscal policy, lowering labour costs and making the system less onerous for employees, simplifying bureaucracy might well have mitigated the growth of unemployment and made Spain more able to generate growth with the general world economic recovery.

Unfortunately and when looking at Spain's recent past, it seems that all Governments have chosen to apply micro-economic policies which, generally, have an immediate and manifest impact, policies which are mostly short-termed and perfect for election driven politicians.

Sadly, Spain has yet to see a long-sighted Government, that will apply optimal macro-economic policies, policies whose impact is neither immediate nor apparent, but long-termed and profound. Spain will need to wait for a Government whose long-term measures will really provide the base to generate a healthy and sustainable economy and make "Spain different" but, this time, for all the right reasons. Sadly, there is no sign in Spain of such a brave political party.